Can you have a currency without trust? My week in Harare.

I visited Zimbabwe for the first time recently. For an economist, Zimbabwe is an exciting place to visit as it is sort of an economic basket case. No doubt a lot of factors played a role in the collapse of the Zimbabwean economy that started at the turn of the century, but the role of poor monetary policy was central. Faced with significant fiscal deficits and an inability to tap international financial markets for debt, the government and the Zimbabwean central bank resorted to printing money. The consequence was spiraling hyperinflation, a collapsed economy, and an eventual abandonment of the Zimbabwean dollar in 2009.

It’s one thing to read about how people survive through periods of economic collapse, but I was curious to see that in practice. So, I arrived in Harare with my little stash of US dollars and set out getting acquainted with the system. To say it was confusing would be putting it lightly. I could spend US dollars but, as I was advised, getting change would be difficult if I didn’t have small bills. Most people converted their US dollars to a then pseudo-currency called RTGS, which had no actual notes but which you could spend via a mobile money application. RTGS were also called dollars and once upon a time they were equivalent to US dollars. You could buy RTGS with US dollars at official financial institutions, but you generally got a better deal if you went to the parallel market, or the “black market”. Then there were bond notes which are apparently actual notes which also used to be worth the same as US dollars but were now worth somewhere between the official RTGS and the parallel market RTGS. A complex web for sure, but people got on with it.

Foreign Currency Ban

The day after I arrived I set up my mobile money account and went about figuring out where to buy RTGS. I could go to a bank, but the rates were much worse than the parallel market rates. My friend called a guy who hooked me up with RTGS at a rate of 13 to 1, almost double what the banks were offering, and I was set. “Don’t change all your US dollars though”, my friend warned. “Things change quickly here”. I only planned to be in Harare for a week and couldn’t imagine things would change that quickly. Still I heeded her advice and changed only half of what I had planned. Lo and behold, shortly after receiving the RTGS in my mobile wallet the news broke. The government had banned the use of all foreign currency, including the US dollar. RTGS and bond notes were now the only valid legal tender. At the same time, it began a crackdown on parallel market dealers who are mostly informal. Things really did change quickly.

A couple of hours later I got in touch with my parallel market guy to find out what was going on. He said people were getting arrested for dealing hard currency and no one wanted to talk about it. He couldn’t say a rate. I looked up websites which are known to publish information on rates from the parallel market and there was similar confusion. It seemed, at least for that day, that the government had effectively shut down the parallel market. The rates at the bank had not changed much though. Things however got a bit more complicated when you actually tried to spend money.

How much is this sandwich really worth?

Prior to the ban most shops and restaurants had adopted something akin to a dual pricing system with both a US dollar price and a RTGS price. Some places listed prices in US dollars but if you wanted to pay in RTGS they would tell you their rate for the day and you could pay in RTGS. Others listed prices in RTGS, but you could see that they updated those prices frequently and you could guess their RTGS to US dollar rates. Those rates were typically close to the parallel market rates.

After the ban though, most places stopped accepting US dollars and listed prices only in RTGS. However, you could see that the prices were still close to what the parallel market rates had been before the ban. If you thought a US dollar was worth 13 RTGS then that sandwich was affordable, but if you thought a US dollar was worth the official seven RTGS then that was one really expensive sandwich. Price stickiness in action.

On my fourth day in Harare, after I had started to run low on my original stash of RTGS, I opted out of the fancier restaurants and decided to go grocery shopping for cheaper food. At the grocery store you could see the same look on people’s faces with the same question: “what is this actually worth”? People now faced with only RTGS prices and no information on what the RTGS was actually worth struggled to figure out if something was expensive or cheap.

“We don’t trust the government with our money”

Throughout the week I talked to various people, from vaya (their Uber equivalent) drivers, to waiters at restaurants, friends, and just random people on the street about their thoughts on the US dollar ban and the return of the Zimbabwean dollar. A common theme resonated across almost everyone I talked to and it can be summarized as people saying, “we don’t trust the government with our money”. To paraphrase a waiter I talked to, “I’m not yet 40 but I have already seen two currency crises. Why should I trust that this time will be different?”.

To a large extent the people are right and the existence of the RTGS currency is proof of that. If you work in finance, you probably know that RTGS stands for real time gross settlement, a back room system that banks use to settle transactions between themselves. After the original Zimbabwean dollar was scrapped, most banks adopted the US dollar as the default currency. It’s a digital world now though and most people don’t need to see physical cash before they spend it. In most countries, if someone transferred $100 digitally to your bank account, you expect that you could go to the bank and withdraw the actual cash. If you wanted to. You trust that 100 cash dollars is equivalent to 100 digital dollars in your bank account. But what if, for whatever reason, you figured out that you couldn’t always get cash dollars at the bank? Houston, we have a problem.

The credibility of the US dollar is based on the fact that only the United States Federal Reserve Bank has the power to print more dollars and add more dollars to money supply. Is that also true for digital dollars? What if a different central bank decided to just add a couple of zeros to its digital US dollar account balances? They wouldn’t be able to redeem all the dollars in cash of course.

At some point ordinary Zimbabweans figured out that digital dollars in their Zimbabwean bank accounts were not the same as actual cash in US dollars. Banks didn’t know which banks could actually redeem their transactions and began to place preference for actual cash over digital transfers. International banks didn’t know which Zimbabwean banks could redeem their digital dollar transfers with cash. Foreign suppliers began to develop a preference for cash over digital transfers. And just like that a new virtual currency called RTGS was born.

Initially there was some denial with the government insisting that one digital dollar was identical to one actual dollar. In practice this meant effectively setting the exchange rate for this new RTGS currency at one to one. We all know what happens when authorities do that. Black markets spring up and eventually the only place to buy currency ends up being that market. Formal firms who have corporate governance rules that prevent them from using black markets eventually can’t compete with informal actors who don’t care so much for rules, and that exacerbates the problems even more.

An interesting place where this scarcity of formal dollars had an impact was in international trade. I did not witness this directly but there seemed to be a recurring theme of importing having turned into a largely informal activity. Simply because the only place to get dollars was from the black market. This, of course, came with consequences for prices.

Eventually, in February, the government accepted that RTGS was indeed not equivalent to the US dollar. Since the announcement in February and my trip the RTGS went from an exchange rate of 2.5 RTGS per dollar to somewhere around 13 RTGS per dollar in the black market. That would probably make it the worst performing currency in the world over that period. The government pinned the blame for decline on the illegal parallel market dealers, but as experience in other countries has shown, they are typically only a symptom of a much more fundamental problem. The problem being that almost no one trusts the authorities.

You could see this lack of trust in the authorities and in RTGS everywhere. While I was in Harare were crippling queues for fuel, but only if you wanted to pay in RTGS. If you wanted to pay in US dollars you could just drive up to the pump and buy. At least until before the US dollar ban. After then ban everyone had to join the queues. Everyone I spoke to seemed to want to hang on to their US dollars for as long as possible. Exporters reportedly even started operating off-shore accounts and implementing dodgy double invoicing practices just to get around having to transfer their dollars to Zimbabwe and being forced to convert it to RTGS. Nigerians will know this double invoicing practice very well.

No more foreign currency please

The authorities, with this new announcement of the US dollar ban, did not help matters either. Speaking as an economist, the fact that the announcements came from the Ministry of Finance and not the Zimbabwean Central Bank was a major red flag. The headlines in the papers quoting the Central Bank governor as ready to get the printing presses rolling was a second major red flag. If I was Zimbabwean and watching this I would probably start getting worried.

By the fifth day of my trip I had run out of RTGS and had to buy some again. After walking to numerous banks, breaking my highest ever daily steps taken according to my fitness tracker, I couldn’t get a rate which I felt was fair and ended up in a dingy street in the central business district trying to do what felt like the shadiest deal I’ve ever done under the cover of darkness. I got a rate of 8.5 RTGS per dollar which was better than most banks. As at the time of writing this the rate had creeped up to between 9.4 and 10.8 according to some websites who track rates. Apparently the people still don’t trust the authorities. Quelle surprise!

To be fair to the authorities they are trying to get the economics right. They did try to remove some of the restrictions on formal trading of the RTGS and have allowed banks to trade on a willing buyer willing seller basis. They have also allowed ordinary Zimbabweans continue to operate foreign currency “NOSTRO” accounts although only for international payments. These accounts are also not accessible to everyone. Still, many restrictions remain and the spread between the official interbank rate and black market rate is evidence for this.

So, what next for Zimbabwe. In my opinion the authorities need to answer a fundamental question: can you really have a currency if no one trusts the authorities. It took decades to erode the trust of Zimbabweans and, regardless of what the government does, and regardless of the validity of the economics, it is going to take decades to gain that trust back. What do you do in the meantime? On this issue perhaps they need as many psychologists as they need economists.